Albert Nahmad – Chairman and Chief Executive Officer Barry Logan – Senior Vice President Paul Johnston – Executive Vice President A.J. Nahmad – President.

Ryan Merkel – William Blair Mike Yang – Susquehanna Matt Duncan – Stephens Inc. David Manthey – Baird Robert McCarthy – Stifel Chris Dankert – Longbow Research Steve Friedberg – Seaport Global Steve Tusa – JPMorgan.

Good morning and welcome to the Watsco, Inc. First Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Albert Nahmad, Chairman and Chief Executive Officer. Please go ahead sir..

when our customers win, we win. So our focus is to help customers be more efficient and more profitable and make it so good to do business with Watsco that only they – with Watsco that they only want to do business with Watsco. That was a mouthful, but I think you get the idea.

Time is money for our customers, so our mobile apps deliver mobile-enabled information and solutions on any device, anywhere. The run rate for e-commerce sales stands now at close to 30%, and we’re very focused on increasing that.

Customers do not have business hours, so our apps and e-commerce platforms provide information and order processing at any time, day or night. For example, over 25% of our e-commerce orders are outside conventional business hours, an indication of their value throughout the entire day.

Customer require products in minutes, not hours and certainly not in days. We have built and are deploying technology that improves order fill rates with speed and accuracy. More locations have adopted our proprietary software, and we expect our entire network will be live by the end of the year.

Customers also require technical assistance throughout the day. We have developed the industry’s largest amount of digitize product information and then mastered over 650,000 SKUs from well over 1,000 suppliers. Now that’s taken us several years to do and will continue to add to that 650,000. Our technology is a long-term mission.

It will take time to scale across the 563 locations that we operate. The 250,000 contractors and technicians that we serve and 7 million transactions that we process and fill each year. On May 18, Baird and Watsco are hosting a Technology Summit for its institution investors to update our progress and provide more insight into our long-term thinking.

It will be a fun and informative day. Now A.J., Paul and Barry, and I are happy to answer your questions..

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Ryan Merkel of William Blair. Please go ahead..

Good morning, Ryan..

Hey, good morning, everyone. Congrats on the strong topline..

Thank you..

So I want to start with gross margins being down a little bit year-over-year. I think a few of us were expecting something a little bit higher just given the strong price back drop.

What were the puts and takes this quarter?.

Barry?.

Good morning, Ryan. How are you? Well, first, again, we had nice growth rate in our equipment business, which just algebraically has a lower margin than the non-equipment business. So there’s some algebra there in the numbers. And also there is certainly was price this quarter.

It is reflected in the equipment growth rate and overall, though, the real baseline of your question is the mix between equipment in non-equipment side of the business..

And then just a follow-up was price cost a positive. I think possibly you could have bought ahead of some of the price increases and had a little boost there..

Yes, price cost was positive for the quarter..

Okay. All right. And then, my second question I’m just hearing that some of the OEMs have announced a midyear price increase.

And I’m wondering what you’re seeing from some of your important OEMs and then could you speak to the amount of the increase and possibly the timing?.

Paul?.

Yes, we have been seeing price increase announcements coming from most of the major OEMs. They’re – they range – it’s pretty much up to 6%, 7%, 8%, but obviously, they’re not going to realize that full amount. They’re much smaller on the – when you get into the real nitty-gritty of what we actually sell..

Okay.

And just maybe lastly, just historically, have midseason price increases generally speaking pretty well? Is that the history there?.

I think this is going to be a trial balloon. I’ve been the industry many, many years and it’s unusual for us to have a midseason price increase. I can’t remember the last one, so I have no basis to say whether it will hold or not. I hope it does..

Okay. Thanks a lot. Appreciate it..

The next question comes from Rob Barry of Susquehanna. Please go ahead..

Good morning, Rob..

Hey, good morning. This is Mike Yang on for Rob..

Hey Mike..

So I was just wondering, can you comment on how growth is tracking so far in 2Q?.

No, we’re not going to do that because first quarter is unusually, as it is every year, not a telltale about what’s going to happen in the rest of the year. So we’re not going to do that..

Sure, no problem.

And just to follow-up, to what extent did hurricane rebuild activity help the quarter?.

Well, it’s not a big impact because our distribution is so large that any single area that requires a lot of attention during hurricane or other – or nature’s disasters doesn’t really affect the overall. It helps a little bit locally but it doesn’t – it’s not big enough to impact the overall business..

Great. Thank you very much..

The next question comes from Matt Duncan of Stephens Inc. Please go ahead..

Good morning, Matt..

Good morning, Al. So obviously, very, very nice HVAC equipment sales growth in the quarter. I think that does in part anyway explain what’s going on with gross margin.

On the equipment growth rate, can you tell us how much was price, how much was volume? And then kind of as a follow-up to that last question, was there any noticeable difference in growth rates geographically that you maybe see things grow faster in Florida as you might be getting some benefit, which I would think is going to last a while if you are hurricane….

Well, generally, we don’t like to give territorial information, because we don’t want to invite our competitors. But let’s see if we can answer your first question.

Barry?.

Good morning, Matt. It’s again pretty healthy unit growth and price and mix. All three were positive and to get to the 8% growth rate for equipment domestically, a slightly higher growth rate than that. So in each case, there was a healthy amount of all three in this case.

Again, we do remind ourselves that in the first quarter and repeating something like that conversation for the rest of the years is – we need to be conservative about that, but that’s a good start for the year for sure..

And along that vein, I mean to follow-up on the question about the second quarter, weather in April has been cooler in a lot of places in the country. And so I assume, it’s possible that that is having a little bit of an effect.

I just want to make sure we get ourselves level set correctly for what type of revenue growth rate you believe is reasonable in the business. Obviously, this was a very good quarter from that perspective. But to be clear, it sounds like I’m hearing we shouldn’t extrapolate that forward to be safe..

Well, those are your own conclusions. You shouldn’t do either one. You should just understand that we won’t the project anything because we’re coming off one of the traditionally the seasonal quarter. The first quarter doesn’t indicate what’s going to happen during the rest of the year. We’re not asking you to conclude anything..

Sure. And then last thing just on SG&A cost, you guys talked about adding heads this year. We saw that in the first quarter.

Can you update us on sort of how far along you are in the headcount additions and what’s planed going forward?.

Barry?.

Sure, Matt. Well, first over the last 12 months, we’ve talked about 140 people being added. I think that number is beginning to mature in terms of year-over-year comparison. So I wouldn’t expect there to be incremental impacts from this point forward, at least not anything material.

This is all built on certain of our business units and their leadership, adding people to better serve markets, customers, also some opportunistic chances to actually get some competitive employment going in certain markets that they tell is important and our job is to support them and then to watch what develop.

So that’s been a span of about a year now. Two of our business units, in particular, that are making those investments. And as the season plays out, we’ll – we look further growth that was the purpose of those investments..

Makes sense. Thank you, Barry. Appreciate the answers guys..

Sure..

The next question comes from David Manthey of Baird. Please go ahead..

Hello, David..

Hi, good morning guys. Back to the manufacturer price increases, we’ve seen a lot of those come through, but haven’t seen anything out of Carrier. Maybe I just missed that or UCX.

But have you had any discussions with them? Do you expect the Carrier brand to follow the mid-single-digit price increases that everyone else has put through?.

Well, I think they have announced a price increase, and I’ll let Paul answer that..

Yes, they’ve announced price increases on both Carrier brand and ICP, and it’s going to be midsingle-digit..

It is certainly. It’s not going to be..

Great. Okay. And then, Barry, when you talked about the price mix, I’m not sure that you gave us a number.

Could you give us a number, there’s a 1%, 2% quantitatively?.

David, I very purposely didn’t give you a number. Just so you know. I’m pointblank about it. Now, again, we don’t want to get into too much competitive information. And just know that there’s a nice dose of each in the growth rate for the quarter. I want to say this too just to reflect on what I said.

Probably every April for the last 20 years that we’ve had this call, we’ve said that the weather [indiscernible] sit here and make predictions on. We are – but in our case, we are deep in the Sunbelt, whether shows up.

It’s going to be a hot summer in our big markets and to get into a short-term kind of ping-pong match on what’s the weather like in April, just really has never been a very relevant conversation..

Well said..

Yes, I totally agree with that. Then second, we’ve heard that the Payne and Bryant brands have been showing up in more large quotes recently and winning them.

Are you gaining more traction into the construction market do you feel today than maybe the past couple of years? I understand it only represents 10% to 15% of your sales, but – and secondarily, is that also part of the reason why the other HVAC products has been growing faster the past two quarters?.

I don’t know. We don’t want to describe what particular brands that we’re marketing, what they’re doing or not doing. Again, it’s competitive information.

Paul, can you shed some color, one way or the other?.

Yes, obviously, we’ve got what, 16 brands that we sell at Watsco, we’re multibranded. We’ve got different strategies for each one as we change them, I really would not like to get into specifics as far as what our strategies are with two particular brands..

All right, guys. Thank you..

The next question comes from Jeff Hammond of KeyBanc Capital Markets. Please go ahead..

Good morning, Jeff..

Hey, this is actually, Brad filling on for Jeff..

Hi, Brad..

Hey, just going back to non-equipment, nice growth in the quarter.

Is that a reflection now just kind of improve productivity with some of the headcount addition last year? Is that more fundamental strength or can you pinpoint that?.

Well.

Who wants that one? Paul? Barry?.

Yes, I’ll take it. It’s really a reflection of just the, one, we’ve got to focus on parts and supply business, among all of our people, which we’ve – which we’re yielding food from. Second thing, a lot of it I think ties into our technology, where we’ve got with our apps, with the bill of materials that are reflected on our apps.

I think it’s easier and more successful for the contractor to source his product from us than other competitors of ours. So I just think it’s a lot of good things coming together for us..

And just on that tech, now that you’ve had this plays – the tools in place for a longer period of time.

When you kind of look at the year-over-year trends, can you provide any update in terms of adoption or [indiscernible] in order what you’re seeing in terms of adoption from the Russell JV?.

The Russell what?.

I’m sorry.

Sigler?.

No, we’re not – we don’t have that information. We’re only a minority owner there..

Okay. I just didn’t know if you sell any – there are more open to the bringing the tech on board or not..

Can’t answer that..

Okay, fair enough..

The next question comes from Robert McCarthy of Stifel. Please go ahead..

Good morning, Robert..

Do you prefer this call or the dentist, Al?.

Yes, it’s great news. Once again reaching record level..

A cynic would say, if April was good results, you’d probably disclose them, right.

No, we don’t think that way. You can say all you want. That’s – we mean what we say. We’re not inclined to distract anybody..

All right..

We don't believe that in the past that we should comment on the second quarter because we’ve learned in the past that second quarter does not necessarily reflect first quarter. It’s a much bigger quarter, and we don’t want to mislead people, who give us credit for being conscious that we don’t want to mislead people..

Understood..

And Maybe you feel this indeed, but we're just being frank..

Now, well, listen, I’m stepping up to the call and like, Mr. Hammond has decided to send the second in this time so he can get his head cut off. In any event….

Well, sometimes you guys deserve to be told that you’re not listening carefully and that was what I did with Hammond..

I see. Well don’t worry, I think Mr. Tusa is on cleanup. So in any event….

What does all that mean?.

Well, I think he's the next one the queue..

I don’t know..

Okay. All right. One more question if you’ll indulge me.

What do you expect in terms of kind of the key messages to come out of your kind of branded Baird event next May in terms of the tax spend and what leverage we can get there not only from growth, but perhaps working capital improvement? Is there anything you can kind of preview in terms of the key messages?.

A.J.?.

We’re going to show showcase and highlight what we’re up to and the impact it’s having. We’re going to have some customers there to give you first hand look at how it’s impacting their businesses, which is the whole point. So you have to come join us..

Well, [indiscernible] All right, thanks guys..

[Operator Instructions] The next question comes from Chris Dankert for Longbow Research. Please go ahead..

Good morning, Chris..

Hey, good morning, Al. thanks for taking my question. I guess one more directed at A.J. here. I guess you did highlight that e-commerce now about 30% of sales here. Also the app is seeing some nice adoption.

Is there anything else tied to that number besides the app at this point?.

As far as e-commerce adoption?.

Yes, yes..

Yes, the e-commerce is not just on the app. It’s on any device. So web domains including. And it’s getting close to 30% and customers – which means the customers are not only using it, but enjoy using it and find value in it, and we’re seeing that in the numbers as well. It helps our productivity.

And the customers that are using the tool and using effectively, they are very sticky with us. Their attrition rate is lower and their growth rate is higher for customers that are using the technologies..

Got you.

Are you – remind us kind of what e-commerce as a percent look like this time last year?.

Much less. It’s – I think it’s growing at a….

[Indiscernible].

Yes, 40%, 50% higher this year..

Okay, okay. And I guess any comment on M&A here, obviously, the market looks good, we’ve got tax reform in the rearview now.

Just any update on what’s out there right now?.

We can’t tell you what’s out there, because these acquisitions, as you know, is – you can’t disclose until they’re done or at least you’re pretty sure you’re going to get it done. So we’re not going to do that..

All right. I mean more on a relative basis of number of targets anything along those lines..

No. No, it’s the same thing. We’re always on the search. We do grow by acquisitions. I think we’ve done over 60 of them, and I think we’re going to continue. The nice thing about our balance sheet is – we think we can do almost any side that comes along. That’s the benefit of scaling. Now we’ve scaled to it. So that we can do that, that’s a positive..

Sounds good and thanks again guys..

The next question comes from Walter Liptak of Seaport Global. Please go ahead..

Good morning, Walter..

Hi this is Steve Friedberg on for Walt. .

Good morning, Steve..

Hi. I think you guys talked a little bit about the apps I mean kind of its – the percentage of individuals who are on it.

But did I catch that right about the entire networks going to be online with all the stores by the end of 2018?.

Sure. That probably can be better explained.

A.J., you want to explain that?.

Yes, that was in reference to propriety software that we’re deploying in the warehouses for the pick, pack and ship process. Picking sort of warehouse guys can pick more accurately, quicker and get contractors in and out of our branches or store is faster and get back on the job site faster.

And that’s an about 300-plus stores today and should be in all of them by the end of the year..

Perfect..

I mean the concept there just to develop that is the idea of having a front-end great customer assessed, order process, information source and so on is great. How we fulfill that those orders 7 million times a year becomes the next treatment in customer enhancement. So that’s second stage. A.J.

is talking about is not only just the order processing on the front-end, but how do we deploy those orders once they’re received. And that’s the world-class process is to see that all the way through to the customer and when they drive away with our products..

Okay, perfect. Thanks for the color. And then going back to the headcount addition question asked earlier, I think on the last call, you guys alluded to new branches and new territories.

Is there any update or any color on that?.

Barry?.

I’m not sure what we alluded to, perhaps what we said is that we opening up new branches. It’s typically something we’ve done within our current footprint within territories to bring density and simply greater local service. And we’ve done some of that this quarter. There’s more of that planned this year.

Outside of our territories tends to be where we focus our acquisition efforts and focused on companies that have built businesses that dominate markets outside of our territory. That’s always been our principal focuses, not green fielding everywhere but focusing on some of the large targets and being patient about it..

All right, thank you..

The next question comes from Steve Tusa of JPMorgan. Please go ahead..

Good morning, Steve..

Hey guys, good morning. I guess Rob got to heard of me here, but just a question on price increase. You talked about I think at least we’ve seen carrier go through with this kind of midyear. Have you seen anything from Goodman yet? There is – we haven’t picked up anything on that front. Anything from….

I don’t think we have – Paul, you….

No.

See anything from Goodman yet?.

Is that typical for them? Do they kind of wait and see and then strike where they can? Or what historically – I know 10, 15 years ago, they were – they had a very – a cost approach, value approach, which served them well.

Is this kind of normal behavior for them? Or what do you think?.

Well, Steve, they’ve had a new owner now in recent years. They’re owned by a very large Japanese company called Daikin, right. So there’s no reference to the years back there because these are different people and they have different goals, and we haven’t to be one of their largest customers, right.

But I don’t think there’s a pattern, Paul, but maybe you could answer that. .

I don’t think there’s a pattern. Like I said earlier, Steve, it’s just – we are in unfamiliar grounds right now due to all the tariff talk and buzz as far as OEMs actually addressing and some of them coming to the played on midseason price increases. Generally, we would be all through with this in December.

So I don’t know if there is a lot of precedents anywhere on this particular price increase..

Any fulfillment issues from any of your suppliers whether its supply chain and tariffs or the new factory they’re ramping up? Anything going on fulfillment wise?.

Paul?.

Yes, I just knocked on wood. No. Right now, I think everybody is in good shape. I don’t think the tariffs, at least from the conversation we’ve had with our various suppliers. The tariff doesn’t appear to have an impact on our availability. The products will be available to us. It’s not going to impede anybody in that regard.

It’s just the pricing that’s going to be unique..

Okay, got it. And then one last one. Carrier – actually UTX mentioned on their call that there was a – they may have been a little bit of a prebuy on these price increases.

Did you guys take advantage of the pricing today to kind of get ahead of what may come midyear yourselves? Did you take on a little bit more inventory than you would have in a normal year?.

Paul, you want to answer that?.

Yes, I think we generally – we do prebuys in – we’re selectively, wherever we have an opportunity..

The answer is we did..

Yes..

Great direct answer. I appreciate it guys. Thanks a lot and good luck for the rest of the year in the summer selling season..

Thank you, Steve..

Thank you..

This concludes our question-and-answer session. I would like to turn the conference back over to Albert Nahmad for any closing remarks..

Thanks again for your interest in our company. We look forward to communicating results in the next quarter. Bye now..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..